Please offer me the reasoning for this factoid:
In countries with WEAKER legal systems, we expect to see HIGHER financial leverage, and greater use of SHORT TERM financing.
I assume that what is implied is that weak legal systems give the borrowers (the companies) less concern of recourse due to default. (correct?)
Why is there greater use of short term vs long term financiing when the legal systems are WEAK?
Thanks in advance…
you can default and no one will fault you for it … no one will try to use legal means to get you for it…
CP - what do you think of their use of short vs long term debt? How does the use of short term debt vs long term debt play into the idea?
Is it that a default on bonds is viewed as more material (considering effect on CDS, cost of debt, etc.) than a default on a line of credit (bank gets pissed and slaps a fee on the firm, but investors may not be aware due to info asymmetry?)
Key sentence: “The quality of investors’ legal protections depends on both the content and the enforcement of the contracts and laws”
So if my understanding is correct.Where legal system is weak less people willing to invest to equity (higher risk,less protection by law,higher expected loss) and also for shorter (afraid to park the money in uncertain / poor legal environment).That is the reason of high leverage and short term debt stucture.